General Practice, Solo & Small Firm DivisionBest of ABA Sections
SPRING 1998 - VOLUME 2, NUMBER 1
Protection of Accountant Documents and the Attorney-Client Privilege and Work Product Doctrine
By Robb C. Adkins
An Historical Perspective. The attorney-client privilege generally protects confidential communications between a client and an attorney when the attorney is functioning as a legal advisor. The purpose of the privilege is to "encourage clients to make full disclosure to their attorneys" so that attorneys can effectively provide adequate assistance and advice. Historically, courts have been reluctant to expand the scope of privileges, and the Supreme Court has specifically held that federal law does not recognize an accountant-client privilege.
The Tax Court recognizes the existence of certain common law privileges. The Federal Rules of Evidence, which the Tax Court is required to follow, state that "the privilege of a witness, person, government, state or political subdivision thereof shall be governed by the principles of common law as they may be interpreted by the courts of the United States in light of reason and experience." In addition, Tax Court Rule 70(b) states that "the information or response sought through discovery may concern any matter not privileged and which is relevant to the subject matter involved in the pending case."
The attorney-client privilege may extend to third-party reports prepared during the attorney-client relationship at the request of the attorney, if used in advising or defending clients. The crucial question in determining whether a taxpayer can posit a successful claim of attorney-client privilege with respect to accountant communications to an attorney is whether the service done by the accountant for the attorney was primarily to assist in legal service or merely for accounting purposes.
There is limited applicability of attorney-client privilege to third-party documents and communications. When a third party has been hired by the client’s attorney to assist in rendering legal advice to the client, then all documents or communications made to the attorney and relating to the legal advice fall under the attorney-client privilege. Conversely, any third-party documents or communications not prepared at the request of the client’s attorney, or not with the purpose of assisting in rendering legal advice will not be protected under the limited attorney-client privilege.
Accountant Beware! The Attorney-Client Privilege Is Inapplicable When the Service Rendered Is Primarily Accounting. What happens in the typical case where the accountant is contacted and engaged by the taxpayers to prepare their return, an audit ensues, and most of the documents requested by the Internal Revenue Service (IRS) are prepared by the accountant during the audit proceedings? The general rule is that the attorney-client privilege may not protect accountant documents prepared for the client or communications with a client when the accountant is acting as the authorized representative of the client before the IRS. Accountant documents and communications that occur in relation to the audit proceedings will not be shielded by attorney-client privilege and may be subject to discovery under Tax Court Rule 70(b). This may be true even when the accountant appears to be acting in response to a request from the client’s attorney.
Work Product Doctrine: A Broader Rationale. The work product doctrine generally protects materials prepared by an attorney in anticipation of litigation. The rationale behind the work product doctrine is that attorneys should remain uninhibited in assembling information, preparing legal theories, and planning strategy. The protection also prevents attorneys from merely appropriating the work of opposing counsel. In contrast, the theory behind the attorney-client privilege is based on the narrow concern of the effectiveness and confidentiality of representation of counsel.
In advancing the broad rationale of encouraging attorneys to prepare legal strategies freely, the work product doctrine often extends beyond the reaches of the attorney-client privilege. Attorneys often require the assistance of others in providing legal advice and, therefore, work product protection extends to "material prepared by agents for the attorney as well as those prepared by the attorney for himself [or herself]."
For materials to be protected by the work product doctrine, they must have been prepared in anticipation of litigation or for trial, and not in the ordinary course of business. In tax cases, "anticipation of litigation" is often satisfied when a summons is issued or some other action indicates a dispute with the IRS. In cases where work product is being asserted over materials that serve the dual purposes of ordinary business and anticipation of litigation, protection by the doctrine will be permitted only when the "primary motivating purpose behind the creation of the materials was to assist in pending or impending litigation."
Strategies for Document Protection Under Work Product. One method of obviating the issue of accountant as representative and avoiding vast uncertainties related to accountant communication protection is to have the attorney initially contact, pay, and send a letter of engagement to an accountant when one is needed to prepare tax returns involving possible contentious positions. While this appears and is in fact potentially burdensome, it is clearly the safest practice.
The attorney should send the accountant an engagement letter that includes the following:
(1) a recital that the attorney is hiring the accountant-agent to assist the lawyer in rendering legal advice;
(2) the nature and scope of the accountant-agent’s engagement;
(3) an acknowledgment that payment will come from the law firm (and not from the client);
(4) an acknowledgment that all records, schedules, documents, etc., of the accountant-agent will be the sole property of the attorney; and
(5) a recital that once the assignment is completed, all of the accountant-agent’s files will be delivered to the lawyer and copies will not be retained.
In addition, the accountant should take other precautions. Accountants should be aware of the implications of their record keeping and always obtain full disclosure from their clients of any circumstances that might lead to litigation, to enable them to advise their clients of the ramifications of certain reports.
Conclusion. It is axiomatic that where an accountant first learns or suspects a client has a tax problem requiring legal counsel, the accountant should immediately advise the client to seek such counsel and should refrain from learning anything further about the matter. Once litigation is reasonably anticipated, accountants should clearly indicate on documents and reports that they are being prepared for possible litigation or, better yet, prepared for the attorney who has hired them. Any extension of attorney-client privilege to accountants, not hired by an attorney and not providing legal advice, clearly falls outside the limited privilege. In light of the fact that the courts have rejected the creation of an accountant-client privilege, these precautions are warranted.
Robb C. Adkins is currently serving as a judicial clerk for the Honorable Rhesa Hawkins Barksdale, on the U.S. Court of Appeals for the Fifth Circuit.
This article is an abridged and edited version of one that originally appeared on page 949 in The Tax Lawyer, Summer 1996 issue (49:4).